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EDA Entrepreneurs: Build To Enjoy

Posted on Friday, Sep 24th 2010

I know I have a lot of readers from the EDA industry. Once a hotbed of innovation, entrepreneurship, and wealth creation, it is an industry that is now moribund. VCs and angel investors have all but abandoned the industry, and those private companies that exist find it difficult to create lucrative exits, a phenomenon that further turns off investors.

This post, however, is a look at the opportunities that exist within this ecosystem and against this general backdrop.

The fundamental problem with EDA is that the product opportunities have very small TAMs (total available markets) which do not really fit the venture model. Even with $50 million–$100 million TAM business opportunities, venture capital is just not the right way to finance these businesses. Angel capital is okay as long as the exit market is active enough to provide liquidity. However, that has not been the case of late, so the funnel has simply choked up.

But, EDA, like certain other segments of the technology industry (security comes to mind as one with a similar pattern), is full of niche innovation opportunities that the big companies are ignoring, but customers have interest in. And that, to me, is where today’s EDA entrepreneurs can play a very interesting role.

No, not by seeking financing to address these opportunities. Forget the investors.

You need to go about the problem a different way: (a) You need to bootstrap (b) You need to bootstrap using services.

You see, in Innovation, Need of the Hour, my most recent book in the Entrepreneur Journeys series, I have discussed the bottlenecks to innovation at length. I have also offered work-arounds to circumvent these bottlenecks, as well as case-studies of how people have done it. True, they have done this in other industries. And I submit that you guys can do it in EDA. Read the book, and you will find significant pointers.

The technologists in EDA are some of the absolute best I know. And yet, you constantly feel frustrated and envious of those in other industries – most notably, the Internet – because they create wealth easily, and by creating much bigger businesses by applying much less technical prowess.

Why is that?

The simple reason is that they have access to larger markets, whereas the EDA industry is tiny in comparison.

But even this tiny industry of $3 billion–$4 billion still has room for you to launch at least fifty startups that will become $5 million–$10 million companies. Now, if you, the entrepreneur, own this company 100%, then every year, you will be bringing in $5 million–$10 million in revenue, a good profit margin, hopefully, and have a long-term, highly cash-rich scenario.

Some of you may even build up a $50 million business and again, if you own 100% of it, you call the shots, tell me what’s wrong with this scenario?

Maybe an exit will come, but even if it doesn’t, you can enjoy the cash-rich situation, and afford a great lifestyle.

I call these Built To Enjoy businesses.

I invite a few hundred EDA entrepreneurs to join the 1M/1M program, and I will work with you such that you can put some innovation and entrepreneurship back into the EDA industry.

And in doing so, I promise, you will create wealth for yourselves.

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I work in the EDA field and found your blog that way. You are correct – the industry has been stagnating. The IC industry is huge so we should be able to grow but we don't for several reasons in my view. First, as you say capital is sucked up by other more lucrative industries. It's not that EDA can't be profitable but investors would rather pour money into the most lucrative opportunities first. EDA companies are often capital intensive. Second, it is a ruthlessly competitive industry with a small number of players. Big EDA companies have a lot of leverage over customers so a better tool can't always get in to customers hands, much less fitting into the ecosystem. Third, there are few but large companies, which have a lot of pricing power. EDA companies need to charge a lot due to this feature which makes it hard for them to sell to smaller companies. Last, customers are wary of new products. The cost of mistakes is large so they tend to stick with proven products and methodologies.

balor123 Wednesday, September 29, 2010 at 6:56 AM PT

I don't agree with your analysis. EDA is not capital intensive. I think entrepreneurs are going about this the wrong way, which is what is causing this stagnation.

And investors don't fund EDA companies not because they cannot be profitable, but rather because they cannot be large companies. VCs ONLY invest in very large – $500M-$1B market opportunities. Those opportunities do not exist in EDA.

In the last 30 years, there were three billion dollar opportunities in EDA: Layout, Synthesis, and Verification. All the rest are small point products with small TAMs – $30-$50M maximum.

These are investment opportunities for bootstrapped businesses that become profitable quickly.

My advice: identify a niche, point problem that the customer REALLY wants to solve, and get them to pay you to solve it. Do it as a service project, but negotiate intellectual property rights, so that you can gradually productize the solution and sell it to other customers. Very soon, you will have a very lucrative, profitable multi-million dollar company of your own.

Who cares if the larger players don't buy you? Just build a cash business, pay yourself and your colleagues good salaries and bonuses.

Enjoy!

sramana Wednesday, September 29, 2010 at 3:24 PM PT

Point tool opportunities in EDA are shrinking. The tool needs to fit in with dozens of requirements in terms of standards (which are not always open). A small company can not invest that much money on product development that does not give its tool any differentiation. The point problems have workable solutions available. The cost of design has increased so much that the major design activity is concentrated among very big semiconductor companies. These companies have enough say to get their problems solved by major EDA vendors.

The cost of sales in EDA remains very high. Also, there is always a ceiling in tools industry. EDA tools enable chip designers. Chip designers think their value comes from IP, EDA tools just help them enable their IP. There is always a limit to CAD software. No programmer can do work without compilers or debuggers but you do not spend 10% of your revenue on those tools. The value of program comes from programmer's logic and not from tool even though he can not do any work without the compilers. The only reason EDA tools get as much money is that the problems they solve are darn difficult and hence it has not become a commodity yet.

Not so long ago, the design houses had big CAD groups. Over a period of time, they found that they can get the best from outside at reasonable price. The EDA vendors can invest in R&D because they can amortize the cost of development across many semi vendors. If the cost of tools become higher, many design houses would want their own teams. The opportunities here lie only in creating new markets which remain small.

Robin Saturday, October 2, 2010 at 1:30 AM PT

I don't think you understood what I said in the post. Note, I said you need to bootstrap using services to get into a point-tool opportunity. Sure you need to do integrations and such, but as long as you come into the opportunity as a service provider first, you get paid by the customer to do the integration. The trick is to bring enough specialized expertise in whatever domain – whatever problem you are trying to solve, that the IC house has an incentive to bring you in to solve that problem, and the larger EDA houses do not have the expertise.

Now, most likely, you learn about the problem while sitting inside a large EDA company. Once you learn about the problem, and you know that you are the world's greatest expert in that particular domain, leave and become an entrepreneur.

Do you see the difference between what I am saying and the assumptions you are making?

sramana Saturday, October 2, 2010 at 10:00 AM PT

Sramana, I so agree with what you have to say about entrepreneurship in the EDA space. I worked for a company whose founder did exactly what you have advised : he worked for a large EDA house, became an expert in the domain he worked, got out, build his small company, and quickly became profitable. His only investment were programming and debugging platforms, and the usual office space. Initially he worked as a service provider and later productized that solution and now has emerged as an industry standard in the domain he has specialized. Yes, he pays nice salaries and bonuses and intends to keep the company that way. He's been around for a while and has done well even in the recession.

I had bigger ambition and chose to move out of the EDA industry, and I agree that EDA is full of smart people and brilliant ideas — this industry is waiting to get the recognition it deserves.

Thanks Sramana for articulating the opportunities in EDA so well.

Vinita Monday, October 4, 2010 at 10:43 AM PT

Sramana,
Since EDA is currently controlled by Big-3 and as every one here agrees that EDA tools solve some of the most complex problems it leads to the question of…
Is'nt EDA a patent minefield for anyone who tries to venture in it?

vijay Thursday, October 21, 2010 at 9:38 PM PT

In software, there are always workarounds. Put your point is well-taken. Something that needs to be looked at in crafting the strategy for the companies.

sramana Friday, October 22, 2010 at 9:09 AM PT

Compared to other industries with which I am associated EDA people have little ability
to file new patents. There are far better scientists outside the so called Big Three than inside.
EDA patent process is totally ridden with their domestic politics. Only exception
was a guy called Steve T. who stayed outside so called Big 3.

If you want to file wrold class Patents just don't hire EDA people.
Look at optical companies and universities.

Tim Mazumdar Wednesday, December 1, 2010 at 1:02 AM PT